Chapter 22 Setting Prices 22 | 3Copyright © Houghton Mifflin Company. All rights reserved. Objectives Describe six major stages of process to establish

Chapter 22 Setting Prices

22 | 3Copyright © Houghton Mifflin Company. All rights reserved.

Objectives

• Describe six major stages of process to establish prices

• Explore issues in developing pricing objectives• Understand importance of identifying target

market’s evaluation of price• Examine how marketers analyze competitors’

prices• Describe bases for setting prices• Explain types of pricing strategies


Development of Pricing Objectives

Pricing objectives – goals that describe what a firm wants to achieve through pricing

Business Planning- Pricing


Stages For Establishing Prices


Pricing Objectives And Typical Actions To Achieve Them


Pricing Objectives

• Survival

• Profit

• Return on Investment (ROI)

• Market Share

• Cash Flow

• Status Quo

• Product Quality


High-quality products are usually priced to reflect the quality level

© 2005 BMW of North America, LLC, used with permission. The BMW name and logo are registered trademarks.


Assessment of the Target Market’s Evaluation of Price

• Price depends on:– Type of product– Type of target market– Purchase situation (e.g: price of concessions

at movies)


Examples Of PerceptionsOf Product Value


Evaluation of Competitors’ Prices

• Regular function of marketing research• Importance of customer view of pricing

and marketing mix variables – Pricing above competition – creates an

exclusive image– Pricing below competition – gains market

share


Some prices are set higher than the competition to create an exclusive image

FIJI ® and all other trademarks, copyrights and intellectual property used herein are the property of FIJI Water Company LLC or its affiliates." Used by permission


Selection of a Basis of Pricing

• Cost

• Demand

• Competition

• Other


Cost Based Pricing

• Cost-based pricing – a dollar amount to the cost of the product

• Cost-plus pricing – adding a specified dollar amount to the seller’s costs

• Markup – Adding to the cost of the product a predetermined percentage of that cost


Markup as % of Cost = Markup

Cost= 15 45

= 33.3 %

Markup as %

of Selling Price= Markup

Selling Price= 15 60

= 25.0 %


Demand-Based Pricing

Customers pay a higher price when demand for the product is strong and a lower price when demand is weak


Non-Price FactorsAffecting Demand

• Product

– Quality

– Range

– Nature- essential/luxury

– Substitutes

• Support

– Service at point of sale & after

– Advertising/promotion

– Distribution Methods

• Market

– Degree of competition

– Competitor action/reaction

– General economic conditions

“Demand based pricing”, N. Coulthurst, 4/3/02, http://www.accaglobal.com/publications/studentaccountant/404831


Point-of-sale service affects demand

Reprinted with permission of Lowe's Companies


Competition-Based Pricing

• Pricing influenced primarily by competitors’ prices

– method increases when:• competing products are homogeneous • organization is serving markets in which price

is a key consideration

www.zillow.com


Selection of a Pricing Strategy

• Differential Pricing – different prices to different buyers for the same product

• New-Product Pricing• Product-Line Pricing – establishing prices of multiple

products within a product line• Psychological Pricing – influence customer perception

to make a product’s price attractive• Professional Pricing – fees set by experienced people

in particular field• Promotional Pricing


Common Pricing Strategies


Differential Pricing Techniques

• Negotiated – final price established through buyer/seller bargaining

• Secondary-market – one price for primary target market and different price for another

• Periodic discounting – systematic temporary price reduction

• Random discounting – unsystematic temporary price reduction

Poll and comments on differential pricing at Amazon.com.


Steps In Developing New Product Pricing

1) Develop Marketing Strategy

2) Make Marketing Mix Decisions

3) Estimate Demand Curve

4) Calculate Cost

5) Understand Environmental Factors

6) Set Pricing Objectives

7) Determine Pricing

NetMBA, “Pricing Strategy”, 2005,

http://www.netmba.com/marketing/pricing/


New-Product Pricing

• Price skimming – charging the highest possible price that buyers who most desire the product will pay

• Penetration pricing – prices set below competing brands to penetrate market and gain market share quickly


Product-Line Pricing Strategies

• Captive – basic product in a product line low while related items higher

• Premium – pricing highest-quality product higher than other models

• Bait – low pricing on one item in line with intention of selling higher-priced item in the line

• Price Lining – limited number of prices for selected lines of merchandise


For Premium Pricing,Engage The Emotions

1) Taking Care of Me - overstressed people want to pamper selves

2) Connect with Friends & Family - serious money to nurture family, romantic getaways, cosmetic surgery, etc.

3) Questing - consumers appreciate adventure

4) Individual Style - personal taste, differentiate self from others

iBizResources, “For Premium Pricing, engage the Emotions”, 2006,

http://www.familybusinessstrategies.com/articles4/041404f.html


Psychological Pricing Techniques

• Reference pricing – moderate pricing positioned next to a more expensive brand

• Bundles pricing – packaging multiple products to be sold at a single price

• Multiple-unit pricing – packaging together two or more identical products to be sold at a single price

• Everyday low prices (EDLP) – pricing products low on a consistent basis


More Psychological Pricing Techniques

• Odd-even pricing – ending the price with a certain number to influences buyers’ perceptions

• Customary pricing – on the basis of tradition• Prestige pricing – setting prices at a high level to

convey prestige


Consumers associate higher prices with higher quality

Reprinted with permission of Mannington Mills, Inc.


Price Of Adult One-DayPassport To Walt-Disney World

$0

$10

$20

$30

$40

$50

$60

$70

1995 2000 2005USA Today Snapshots, “The Price of Amusement”, May 12-14, 2006, p. A1.


Sample Prestige Product Prices


Concept of Professional Pricing

Professional pricing carries the idea that professional have an ethical responsibility not to overcharge customers

Aetna Physician Pricing Transparency


Types OfPromotional Pricing

• Price Leader- firm prices a few products below the usual markup, near cost, or below cost

• Special-Event- advertised sales or price-cutting linked to a holiday, a season, or an event

• Comparison Discounting- price is set at a specific level and simultaneously compares it with a high price


Special events are often seasonal and employ special-event pricing

Reprinted with permission of Montage, Inc.


Determination of Price: Pricing Strategy

• Yields a certain price- may need refining

• Helps in setting final price

• In absence of government price controls, remains flexible and convenient to adjust the marketing mix

Documents

Chapter 22 Setting Prices 22 | 3Copyright © Houghton Mifflin Company. All rights reserved. Objectives Describe six major stages of process to establish